Analysis – Global outlook darkens, central bank pivots signal more turbulence By Reuters

By Leika Kihara, Howard Schneider and Balazs Koranyi

JACKSON HOLE, Wyoming (Reuters) – Growing signs of weak growth and emerging labor market risks overshadowed a gathering of global policymakers at the U.S. Federal Reserve’s annual Jackson Hole conference, highlighting the changing trajectory of monetary policy as how the American and European central banks look. reducing interest rates.

Even as the focus of U.S. and European central bankers shifts from high inflation to sluggish labor markets, the Bank of Japan reaffirmed its determination to wean its economy off decades of monetary support amid growing signs of sustained price growth.

The divergence in policy direction, along with persistent weakness in China, the world’s second-largest economy, points to troubled times for the global economy and financial markets.

Policymakers meeting at the annual economic symposium already had an inkling of what might come when weak US jobs data earlier this month reignited fears of a recession and triggered a deepening market disappointment by the BOJ’s surprise interest rate hike in July.

So far, many analysts agree with the International Monetary Fund’s projection that the global economy will pick up modest growth in the coming years as the US hits a soft landing, European growth picks up and China emerges from the crisis.

But such bullish forecasts rest on shaky ground, with doubts emerging over the prospects for a US soft landing, eurozone growth failing to rebound and China suffering from sluggish consumption.

As major central banks move toward interest rate cuts, it remains too early to say whether the moves could be categorized as a “normalization” of tight policy or the first steps to prevent growth from falling further.

The uncertainty could leave global stocks and currencies susceptible to volatile swings.

“We could see further episodes of market volatility as markets are in a bit of uncharted territory,” as major central banks enter a cycle of monetary easing after tightening policy to deal with a burst of inflation, said IMF Chief Economist Pierre-Olivier Gourinchas. .

“Japan is in a slightly different cycle. Markets have to figure out what it all means, and markets are overreacting. So we’re going to have additional volatility,” he said.

RISKS OF GROWTH

In his long-awaited speech, Fed Chairman Jerome Powell on Friday hinted at an imminent start to interest rate cuts, saying a further cooling of the labor market would not be welcome.

It was a significant shift from Powell’s comments as inflation rose in 2021 and 2022 and cemented the view that the Fed is pivoting from a policy that has pushed its benchmark rate up for a quarter of a century and kept it there there for more than a year.

New research presented in Jackson Hole showed that the US economy may be close to a tipping point where a continued decline in job openings will translate into faster increases in unemployment.

European Central Bank policymakers are converging on an interest rate cut in September, partly due to moderating price pressures, but also due to a notable weakening of the growth outlook.

The eurozone economy barely grew in the last quarter as Germany, its largest economy, contracted, manufacturing remains in deep recession and exports fell, largely due to weak demand from China.

“The recent rise in negative growth risks in the euro area has strengthened the case for an interest rate cut at the ECB’s next monetary policy meeting in September,” said Olli Rehn, the ECB’s rate setter.

Even in Japan, recent inflation data showed a slowdown in demand-driven price growth, which could complicate the BOJ’s decisions on more rate hikes.

While consumption rebounded in the second quarter, there is uncertainty about whether wages will rise enough to compensate households for the rising cost of living, analysts say.

“Domestic demand is very weak,” said Sayuri Shirai, a former BOJ board member now an academic at Tokyo’s Keio University. “From an economic perspective, there is little reason for the BOJ to raise rates.”

CHINA PRISONS

Adding to the gloom is China.

The world’s most populous country is teetering on deflation and facing a protracted housing crisis, rising debt and weak consumer and business sentiment.

Weaker-than-expected growth in the second quarter forced China’s central bank to make surprise interest rate cuts last month and raises the chance of a downgrade of the IMF’s growth forecasts for the country.

“China is an important player in the global economy. Weaker growth in China spills over into the rest of the world,” said the IMF’s Gourinchas.

Further signs of slowing US and Chinese growth would bode well for manufacturers around the globe who are already feeling the strain from tepid demand.

Private surveys showed factories struggled in July in the US, Europe and Asia, raising the risk of a weak global economic recovery.

For resource-rich emerging economies such as Brazil, China’s slowdown could hurt metal and food exports, but could help ease inflationary pressure through cheaper imports.

Brazil’s central bank governor Roberto Campos Neto, speaking at Jackson Hole’s closing session, said: “The net effect … depends on how much the deceleration is.”